Hoskins And Aiyagari Summary

Reviewing the articles assigned, Hoskins and Aiyagari provide their stance on a zero inflation objective to achieve price stability and refer to one another’s viewpoints. Hoskins is an advocate while Aiyagari is not. Hoskins’ stance is based on three main reasons: the Central Bank has control over the price level of goods and services over time but no control over the growth of output, if the commitment by the Central Bank is seen as credible it can promote economic efficiency and growth, and zero inflation is better than inflation rate stability. The article is a mix of his viewpoints and response to critics, such as Aiyagari. Both provide decent arguments; however, I tend to find Aiyagari’ s more convincing overall as his arguments seemed more logical and factually based. Hoskins’ refutes did not seem terribly substantiated or

logical. In addition, his tone made him appear less credible.
Aiyagari begins his critique stating theoretical models in favor of zero inflation are incomplete, provide poor suggestions, and empirical evidence is typically inconclusive leading to analysis with a fair amount of judgement rather than facts. From there, Aiyagari dives into the reasons behind his stance. The major reason is in relation to transition costs and if the central bank can make a credible commitment. Aiyagari notes moving to zero inflation would increase unemployment, at least temporarily, as an unexpected drop in inflation would lead to a real wage increases. Employers would be paying more than expected and in turn reduce production and/or lay off workers thus increasing unemployment and/or reducing economic output. Individual consumption would also likely decline. In class we saw that lower inflation growth is associated with higher unemployment so this reason is logical to me which makes me lean toward Aiyagari’ s stance though it is too early to make a decision on which side I agree with.
These are considered transition costs which reduce economic welfare; the size of this cost would depend on how credible the public views the Central Bank’s commitment to the new policy.

While Aiyagari notes, much like Hoskins, that the Central Bank can control the price level of goods and services, it can only be done if the commitment is seen as credible, which the author is skeptical about since the federal government hasn’t been able to contain federal debt recently on several occasions. I would also be skeptical as the issue of federal debt has been seen in the news often. Just within the past month it has been reported that the U.S. federal debt is climbing to 150% of GDP by 2047; currently, it’s at 101% of GDP (http://www.cnbc.com/2017/03/30/debt-and-deficits-are-going-to-explode-in-the-next-30-years-cbo-says.html). According to Aiyagari, to be viewed as credible, the Central Bank and fiscal authorities need to join forces over the long run. This is because to maintain to maintain the federal budget balance, fiscal authorities need to adjust taxes; otherwise the bank has to change their course to deal with accumulating public

debt.
Circling back to transitions costs, a typically cited benefit of eliminating inflation is a reduction in transition costs. Aiyagari states the benefit would be minimal based on several studies providing welfare estimates when analyzing benefits from reducing transaction costs. The estimates vary in size and definition but all are fairly small at .45 percent or less of GNP; benefits are likely on the lower end and possibly even lower than these estimates as they do not take into account other significant factors, according to Aiyagari. Another aspect is economists who favor zero inflation tend to assume this replacement would not reduce economic welfare when estimating the benefit of the objective. Inflation is essentially a tax, which is a major source of income for the government. If it were set to zero the government would likely replace it with another source of revenue. Aiyagari notes that the only tax that doesn’t reduce economic welfare is lump-sum taxes. In addition, the removal of inflation could lead to cash transactions being encouraged due to evasion of taxes. The author suggests alternatives for creating benefit out of reduced transaction costs, such as increasing the amount of forms of money used in transactions to increase market interest rates and decrease the balance of forms of money that do not.
For the majority of the transition cost argument I side with Aiyagari due to the statistics from studies and logically, I would agree that the government would find a different form of taxation which could possibly lower economic welfare. However, considering we do not use lump-sum taxes now (implying economic welfare has already been decreased), I would argue that another form of tax may not reduce economic welfare, but keep it the same. It would depend on what the tax is and we would need more information on the possible other taxations to draw a conclusion on whether it would hurt economic welfare further just based on taxes or keep it the same.
Hoskins refutes opposing stances within his article using various reasons. First, he also critiques economic models arguing that ones used for optimal inflation analysis typically have little to no real world frictions which causes the high cost of moving to zero inflation, thus criticisms due to small benefits is unsurprising. I can see this point; however, I would need more information to change my stance. He also argues having inflation is costly in itself and there should be analysis on the cost and benefit when actually in a zero inflation policy rather than just the transition period. Aiyagari cited studies with estimated sacrifice ratios of six and ten percent of a year’s GNP, or eight percent average. With that, the loss of output from 5-year zero inflation policy would be 40 percent of a year’s GNP. This seems like too large of a cost to be covered by the benefit of zero inflation and Aiyagari’s use of sources provides more credibility to his argument.